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Coinbase is bracing for a long winter

Protocol Fintech

Good morning, and welcome to Protocol Fintech. This Wednesday: Coinbase’s frigid earnings, the student loan freeze and the risk of relying on interchange fees.

Coinbase braces for a long winter

Six months after Coinbase CEO Brian Armstrong suggested that crypto winters are a thing of the past, his company finds itself trapped in one.

And it looks like the company could be snowed in for a while.

Coinbase posted dismal second-quarter results as the company saw a big drop in revenue from a dramatic crypto downturn. It’s unclear when the slump will end. Chief financial officer Alesia Haas told analysts that the company was making plans for “a multiyear winter.” After all, crypto winters, she noted, typically last two to four years.

The weather got really bad fast. While Coinbase prides itself as “an all-weather company with experience in navigating through crypto asset price cycles,” the downturn “came fast and furious.”

  • Coinbase’s second-quarter revenue plunged to $808 million, down from $2.2 billion for the same period last year. That led to a whopping $1.1 billion loss compared to $1.6 billion profit for last year’s second quarter when Coinbase was a crypto powerhouse leading a fast-growing market.
  • But the last quarter has been brutal. Coinbase took a hit from a crypto crash that saw the market shed $2 trillion in value over the last eight months, “primarily driven by macroeconomic conditions and shocks to the crypto credit environment.”
  • The slump featured “a shift in customer and market activity,” as customers, already pressured by rising interest rates and prices and a gloomy economy, made fewer trades — or simply stopped trading altogether.

Surviving winter is a tough balancing act. The market conditions have forced Coinbase to scale down its quest for growth and focus more on cutting costs.

  • Coinbase has slashed its workforce by 18%. Haas said the company has lowered its projections for “technology and development and general administrative expenses” and taken a “pause, maintain and prioritize” approach to product development.
  • These moves may not bear fruit immediately and she said “it will take some time to fully realize the financial impact of all of our actions.” But Coinbase is “cautiously optimistic” that the plan will be enough to pull the company out of a hole.
  • But then again, crypto is a notoriously unpredictable and volatile space. A lot depends on what happens next. The total cryptocurrency market has stabilized, as bitcoin’s price recently rallied to around $23,000 after plunging to near $19,000 a month ago.
  • Haas said Coinbase’s “optimism is conditioned” on the crypto market “not deteriorating meaningfully below” where it was in July and “we don't see another significant change in the behaviors of our customers.”
  • If things get worse, though, Haas said Coinbase “may not be able to reduce our expenses quickly enough.”

“We’ve seen this all before,” Armstrong told analysts on the call. Crypto winters “always seem a little bit scary, especially if people haven't gone through them before,” he said. Downturns are “never as good as it seems, and it's never as bad as it seems.” But yes, he spoke too soon. Crypto winters are still very much a part of the industry’s story.

— Benjamin Pimentel (email | twitter)


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On the money

Creditors committee plans to investigate Celsius Network leader. A committee representing unsecured creditors of the bankrupt crypto lender said it intends “to thoroughly investigate the prepetition conduct" of CEO Alex Mashinsky.

Wall Street is sweetening on insurtech firm Lemonade. The company's previously struggling share price climbed 12% on Tuesday, the day after the company's earnings report beat Wall Street's revenue estimates and Lemonade leaders pledged to cut costs. Cost-cutting is all the rage for fintech firms these days.

Interactive Brokers is expanding crypto trading. The automated global electronic broker announced that customers can access 24/7 crypto trading through a partnership with Paxos Trust Company.

The student loan moratorium boosted credit scores. The pandemic-era freeze on student debt payments has “dramatically” improved credit scores for Americans who borrowed money to pay for college, according to the Federal Reserve Bank of New York.


The Treasury Department'srequest for comment on how the government should approach cryptocurrency closed on Monday. Government officials now have nearly 300 submissions from a range of individuals, interest groups and businesses to sort through, highlighting a wide range of views on crypto. Here are some of the highlights:

The Blockchain Association'sKristin Smith and Jake Chervinskywrote that digital assets will expand into many use cases but "it is critical that the regulatory and legal uncertainty around digital assets is resolved."

A group of consumer-focused advocacy groups, including the National Consumer Law Center, wrote,"We see little to no legitimate use for cryptocurrencies and few, if any, potential benefits that are not heavily outweighed by the high degree of risk, harm, and evasion of consumer protection laws."

PayPalsaid the U.S. could be at risk of falling behind in developing a central bank digital currency. "This accordingly marks a unique time where a 'whole of government' approach is needed to support U.S. digital asset innovation that incorporates core democratic values and a focus on privacy, security, and consumer protection."

Ripple Labs wrote that the U.S. should be a digital asset leader. "However, 'regulation by enforcement' — the preferred approach of U.S. regulators — has served only to wreak havoc in the digital assets currency marketplace, hurting consumers and industry alike."

Just one question with
Leland Strange, President and CEO of CoreCard

Leland Strange has worked in card management systems since 1984 and first became CEO of Intelligent Systems Corporation (renamed CoreCard) in 1986.

Are there any fintech business models you find particularly risky?

There is no business model that works that relies greatly on interchange fees. If your business model is dependent on interchange fees, you are always going to be subject to changes — regulatory or otherwise. And inevitably, those fees are going to go down. Whether they go down through the passage of a law or they go down because people find ways to work around them, they were always going to decrease.


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